How to Increase Profit Margins: This Is What You Need to Do

Many business owners focus only on growth when trying to increase their profits. Often the easiest path to increased profit isn’t more sales, but greater profit margins on the sales you already make.

Knowing how to increase profit margins is an essential skill for business owners. Small increases in profit margins can lead to significant increases in operating profit. Here is our guide on how to improve profit margins.

Velocity

The quicker your turnaround time, from order to delivery, the lower your overhead costs, and the higher your profit per order. Audit your systems of order and delivery.

How can you speed up this process? What can be eliminated? What can be automated or pre-done? A more efficient process lowers your cost per sale.

Up-Sell and Cross-Sell

If you are not up-selling and cross-selling, you are missing out on an opportunity to increase your average sale price. Up-selling is offering your customers more expensive products with higher profit margins.

Cross-selling is offering your customers complimentary products. Both of these strategies will increase the amount you sell to each customer at one time.

This also allows you to amortize your marketing costs over a larger unit of sale. This dilutes your marketing cost for each sale and improves your profit margins in this way too.

Focus on High-Margin Clients, Products, and Services

Audit where you spend your time and energy as a business and conduct a margin analysis of your key products, services, and clients. Identify which are the most and least profitable.

You will need to know the difference between operating profit margin, gross profit margin, and markup. Learn more about margin vs. markup.

If you are investing time and energy into products, services, and clients that are not your most profitable you need to ask yourself why. Some business owners do this naturally in an attempt to help them perform better.

Your time is better spent growing your business where it is already performing well. Either grow sales within those areas or strategize ways to expand those offerings further.

Retention

It costs more to acquire a client or sale than it does to keep an existing one. Attrition costs. Study your business and identify which products, services, and clients are the most easily retained. What is the drop off point for clients? How can you reinforce your business to reduce that drop-off?

You might consider your most loyal clients and customers as rusted on. But, building loyalty with a well-timed offer or even an email will pay off. Money spent keeping customers is much more efficient than money spent on finding new ones.

Wastage

Every business will have some wastage or spoilage. The best ones are proactive in fixing these issues. Do you have quality issues with production? Do you keep too much inventory on hand? Do you buy leads that your sales team doesn’t or can’t follow up on?

Spending time understanding wastage issues and finding solutions can greatly improve profit margins. Many business owners accept wastage as a necessary cost, but this does not have to be the case.